Richard Butler Creagh: Negative interest rates

The market is showing it’s impatience as we emerge into economic slowdown. Mankind do not like to postpone the purchase of something we want to have them now. However, we can be incentivised to postpone purchases if the reward is sufficient. For example: I will not buy my dream house now because it is expensive at the moment and in half a year it will be cheaper. Of course, I want to have it right away, immediately, but I am ready to wait, because more money in my pocket encourages us to do so. In the opposite situation, if I knew that in half a year it will be more expensive, then of course I would buy it immediately.

It is exactly the same with saving and interest rates. We keep savings in the bank when we know that we will be able to buy more for them in the future. This occurs when real interest rates are positive. Real rates are the interest on the deposit minus inflation. If we earn 3% a year on the deposit and inflation is 4% a year, then we lose 1% so the real interest rate is -1%. It is obvious that we do not want to stop our consumption if someone tells us: “lend me money for a year, and after a year you will get 1% less”. By this year, we could already enjoy all the things we want to buy for our money. Where’s our encouragement?

This brings us to the monetary policy of central banks. Central banks are lowering interest rates to “stimulate” the economy. In this way they want to stimulate consumption and expenses. The Bank of England’s monetary policy keeps the interest rates at 0.75% and has been very low for years now to stimulate slowing economy. In Europe and Japan, however, it went even further. The European Central Bank, the Central Bank of Japan, the National Bank of Switzerland and the Swedish Riksbank keep interest rates below zero. This is an extreme step in rescuing slowing economy and it is a very vivid sign of emerging slowdown. Experts say that we can experience a 2008 slowdown which can have once again a devastating effect on the economy. First sign of such occurrence is the increased value of gold which is at it’s peak meaning that there is a huge demand for it as people are investing in safe havens, gold being the hard safe haven. If governments are borrowing money on negative interest rates at whatever term the borrowers is being paid to borrow money. This is not repeated into the customer however lower interest rates incentive borrowing and may lead over borrowing and if any of the assets loose value, like houses, recalling capital will be problematic. We might have heard this before a few years ago.

Richard Butler Creagh offers short-term bridging finance company specialising in loans between three months to a year, of between £100,000 to £1,000,000 for the professional property developer. If you’re seeking bridging support and have asset security available, contact  the Richard Butler Creagh via our website here as we offer fast, flexible solutions to your bridging requirements. Check out how interest rates affect the stock market on the Richard Butler Creagh  Pinterest page here. More about the Richard Butler Creagh here.

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